Indian exports will be under stress despite currency depreciation: IDFC

"The global demand for India’s commodities in the rest of the world is another factor and therefore, overall growth perspectives do matter for India in the export market."ET Now | January 15, 2016, 16:01 IST

In a chat with ET Now, Indranil Pan, Chief Economist at IDFC, shares his thoughts on the economy. Excerpts:

ET Now: Are you heartened by the fact that we seem to be getting immune to bad news coming out of China?

Indranil Pan: There definitely seems to be some stability in the China story but I don't think the whole genie can be put into the bottle immediately, meaning there has to be relative depreciation pressure on China as well as on emerging Asian currencies including India. The bigger issue is how commodity prices will react. So we are once again trying to question the strength of growth within the emerging market economies.

This means that the overall allocation for these emerging market economies could actually be lower. So there is a relative depreciation pressure that is likely to continue on the rupee for some time now.

ET Now: What do you make of the PBOC action? It sometimes seems to be in favour of depreciation and at other times when the yuan does depreciate, they seem to be stepping in and stemming the slide also. Is PBOC still testing market forces? For them, the experience is still relatively limited, now that China has become part of the SDR basket. At the same time, they are not prepared to have it entirely market-determined. So what do you make of the PBOCs action?

Indranil Pan: I would be looking at how market sentiments are reacting to these actions. Investors are slightly confused about the Chinese economy and whether the PBOC would be able to stop this currency depreciation pressure. So at certain points in time, when the PBOC actually does something in the market, it is not factored-in completely. People continue to expect that they would lose control over market forces and that is what is basically happening in China at this point in time.

ET Now: There is a lot of controversy about the role of the exchange rate in promoting exports - whether it is global demand or the exchange rate. But if you look at the latest trade numbers that have come from China, the depreciating currency has come to China’s aid. Exports have grown even in a shrinking market. So do you think we in India need to relook the premise that we seem to be working on that exchange rates really do not matter as far as exports are concerned?

Indranil Pan: It is definitely not true that exchange rates do not matter at all. They are ultimately the adjusting factor between the inflation differential, which keeps your economy competitive. But on the other side, the bigger influence on India’s export market is the demand from the rest of the world. To a certain extent, the type of commodities that we are heavily exporting clearly gets linked with the overall growth dimensions in the rest of the world.

So unless the overall world economy tends to recover, there could be a difficult scenario for India to push exports into the global markets despite the currency depreciation. So currency depreciation is just one factor. The global demand for India’s commodities in the rest of the world is another factor and therefore, overall growth perspectives do matter for India in the export market.